Recapping last week: Health care isn’t a normal market because health costs are so… Recapping last week: Health care isn’t a normal market because health costs are so concentrated. A small share of people make up a large share of health spending, as some treatments are rarely needed but very expensive. Since any of us could need such treatment, we want health insurance. But a market where individuals buy insurance collapses, so the feds coax the market into existence with tax breaks for insurance. Our system currently suffers from a great deal of waste, price inflation and inequity.

This week, I’ll make an argument for how other countries do health care.

To control cost and waste, other industrialized countries use a “single-payer system,” i.e. a government-owned insurance company to which everyone is required to subscribe. Have you ever noticed “FICA” next to a dollar amount on your paycheck? That’s the amount our government charges for unemployment, survivors, disability and old age insurance.

If we had a single-payer system, the government would deduct the cost of your policy from your paycheck as well. Medicare is a single-payer system for the elderly, so it would be like if Medicare covered everyone. Actually, Canada’s insurance is called Medicare, posers that they are. We’ll call our hypothetical system “Lewiscare.”

Why would a single-payer system be cheaper than private insurance? There are four reasons as to why Lewiscare’s premiums for would be lower:

First, Lewiscare doesn’t earn a profit. The insurance industry is somewhat conglomerated, so lots of the money you pay as your premium goes to shareholders.

Second, private companies investigate and screen each customer, process his data to find his likelihood of getting sick, and then tailor a quote. This is costly. Lewiscare covers everyone automatically, so there’s no screening.

Third, private companies compete with advertising. You have to buy Lewiscare, so it doesn’t advertise much.

Fourth, each private insurer has an administration. Consider this: Two car factories can make twice as many cars, and two farms can grow twice the corn. However, one insurance company can cover the same number of people as dozens of insurance companies, but with a consolidated management.

These reasons make Lewiscare more efficient. According to economist Paul Krugman, private insurers spend 11.7 cents on the dollar for administrative costs, while Medicare’s administration costs 3.6 cents on the dollar and Canada’s system, just 1.3 cents.

The less costly the administration, the more actual health care our dollars buy. In a broader measure, Krugman claims that in America, bureaucracy accounts for 31 percent of total U.S. health spending, but just 16.7 percent in Canada.

I hope I haven’t gotten anyone too pumped up about Lewiscare, though. We’ve only addressed part of the issue. It’s true that lots of our health money is wasted on bureaucracy. But even 30 percent savings could be wiped out over time by current health inflation. Why the inflation?

Let’s say a new knee surgery is invented. It works a little better than the old knee surgery, but is a whole lot more expensive. Is it really worth it? It’s hard to say, since 85 percent of American health expenditures are paid by third parties, rather than customers, according to the Economist.

People will opt for more expensive medicine, even if the outcome is only a little better. Likewise, a doctor may tell me I need an MRI, even if it’s likely unnecessary. If I’m covered, I might as well get it. My doctor and I are both acting with a “just-in-case” attitude that, probabilistically, is like getting your breaks checked twice a week. Over time, unrestricted demand leads to higher prices and bigger premiums.

Single-payer systems rely on government rationing. Health economists decide what treatments should be covered, and under what circumstances they make sense. It’s more austere. There’s not as much frill and miracle-making. But this rationing keeps prices in check. You’re still free to buy supplemental private insurance, though, as 90 percent of the French do.

In a sense, this rationing may be comforting. Health care, after all, is very confusing. To others, government rationing is confining, an attack on choice and innovation. It’s more your personal preference here, and next week I’ll talk about free-marketish plans for better coverage with more choice. I’ll leave you today with some thought-provoking statistics:

The average income of a French physician in 03 was $55,000. An American, $194,000.

– Arnold Kling.

Just one in six U.S. health dollars is paid out of pocket.

– The Economist

Our government spends 6.8 percent of our GDP on health care. Canada’s spends 6.9 percent, and covers everyone.

– World Health Organization

In ’03, America, France, England and Canada respectively spend 15.2, 10.4, 9.9 and 7.8 percent of GDP on health care.

– Kaiser Family Foundation

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